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InPeru New York

Expanding Equity Market Liquidity in Peru

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Consultation process context

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MSCI Peru - number of constituents evolution

Source: MSCI

0

2

4

6

8

10

12

nov-10 may-11 nov-11 may-12 nov-12 may-13 nov-13 may-14 nov-14 may-15 nov-15

Investable securities Standard constituents IMI constituents

Investable securities for MSCI has decreased significantly in recent years.

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1. Market reforms: Progress to date

3

Objective: Improve conditions for better liquidity

2013 2014 2015 April 2015

May 2015

August 2015

September 2015

October 2015

November 2015

December 2015

January 2016

February 2016

MSCI Inc. begins Peru consultation

FIRBIs (REITs) Law

Law N° 30341 Capital gain tax

exemption Market Making

facilities

Market Regulator (SMV) approves Algorithmic Trading with DMA

MSCI: Peru remains as Emerging Market

Meeting with MSCI (NY)

Creation of Steering Committee with Government

PERUFID 2015 Seminar

100% fee waiver to broker dealers proprietary trading from the Exchange, CSD and Regulator

100% fee waiver for stock lending

Capital gain tax exemption: final rulings

Stock lending begins

Market Making: Alicorp Pacasmayo Graña Volcan Ferreycorp 2nd Roadshow

USA

Exchange Fee’s reduction

Oliver Wyman research

New Market Maker model

Mexico is incorporated to MILA

Millennium platform is launched

New model for Stock lending

S&P/BVL indexes

Foreign securities market

2nd Roadshow Europe

Communication

plan

Capital gain tax exemption: initial rulings

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4

-> Progress -> Pending

1\ SMV: Market Regulator BVL: Lima Stock Exchange CAVALI: Local CSD

Details

New Tax Law issuance Law 30341 Sep-15

Tax Law Rulings and execution by BVL and

CAVALIRulings and execution Dec-16

New tax treatment Law 30341 Sep-15

Tax Law Rulings and execution by BVL and

CAVALIRulings and execution Dec-15 / Feb-16

Companies with little Liquidity to hire Market

MakersStocks with Market Makers Feb-16

Availability of inventory Asset Managers ready Mar-16

Operational capabilitites by Broker Dealers Broker dealers ready Mar-16

Transactions Increasing number of transactions Jun-16

4 Short Selling Investment opportunity when prices fall Transactions Increasing number of transactions Jun-16

5 Algorithmic TradingNew system that facilitates trading via DMA, which

reduces transaction times and costs.BVL and SMV New rules approving Market Making Entrance of Algorithmic Trading Mar-16

6 Millennium

New trading platform that allows algorithmic

trading via DMA, market making, stock lending

and short selling

BVL Transactions Platform go live May-15

7FIRBIs

(REITs)

Promote the use of real estate investment funds

that: (1) provide tax benefits (income tax deferral);

y (2) instrument diversification. Includes positive

aspects of the Mexican FIBRAs Model).

Government, BVL and

SMVCreate first REIT by 2016 Year End

Begin working structure with potential

issuersMar-17

Stock Lending

Initiative

1Eliminate Capital

Gains Tax

Applies to transactions with volumes that represent

less than 10% of the company's total value and

with a minimum traded volume of 4 UITs

(approximately US$.4,700).

Government

Improvement proposedResponsible party Objective Deliverable Date Status

2Incentivize market

makers

Market makers to generate minimum liquidty and

to exempt securities from CGT. Issuers take a

more active role

Government, BVL and

SMV

3 Stock lending for arbitration and new strategies.

BVL and SMV

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-> Progress -> Pending 1\ SBS: Banking and insurance Regulator AFPs: Pension funds

Details

Special Cost for Market Making activities 0bps Dec-15

Special Cost for Facilitation 0bps Dec-15

Special Cost for Stock Lending 0bps Dec-15

Implement Stock Lending Operational readiness Mar-16

Promote Market Making Formal endorsement Jun-16

10Alternative

Securities Market

Gives medium-sized companies access to the

capital markets (incubator)BVL, SMV Improve existing system Higher issuance Dec-16

Encourage companies to adhere to the principles

of Good Corporate Governance. SMV, BVL, EY Improve overall market results Better market results May-16

Corporate Social Responsability SMV, BVL

Allow investors to perform a more complete

risk management and identify investment

opportunities with long-term horizon

SMV Resolution 033-2015 Dec-15

12 Investor RelationsReiforcing investor relations and improving

information of key companies.BVL, EY Improve overall market results Market guidance Apr-16

13 Peru FIDAnnual event to promote the Peruvian capital

markets for foreign and local investors

Positioning BVL as an opinion leader and

promote knowledge of capital marketsPositive market feedback Nov-15

Visits to international investors May-16

Improve website and communication Jun-16

15 MILA Local limit for Pension Funds AFPs, SBSEnsure that pension funds have the same local

limit for securities of MILA markets

Portfolio diversification for pension

fundsDec-16

14International

PromotionGenerate visibility of Peru with promoting activities

Communicate new measures and solutions to

major global investors.

Deliverable Date Status

11Corporate

Governance

BVL

Initiative

Improvement proposedResponsible party Objective

Pension Funds Pension Funds will act as "stock lenders" SBS

8 Transaction costsKeep transactions costs low and develop a

strategy to cut them efficiently.

9

BVL, CAVALI, and SMV

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2. Changing the liquidity trend

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12 - month ATVR gap (%)

1\ Cons iders a FIF of 0.55. BVL estimates based on MSCI methodology

* Stocks with Market Maker

-1% 1% 3% 5% 7% 9% 11% 13% 15%

Unacem

Graña y Montero*

Milpo

Edelnor

Pacasmayo*

Ferreycorp*

Alicorp1\*

IFS

Volcan*

Inretail

ATVR 12 month

feb-16 jan-16 dec-15 nov-15 oct-15

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2. Changing the liquidity trend

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3 - month ATVR

BVL estimates based on MSCI methodology * Stocks with Market Maker

0%

5%

10%

15%

20%

25%

nov-14 jan-15 mar-15 may-15 jul-15 sep-15 nov-15 jan-16

IFS Alicorp*

3 - month ATVR

BVL estimates based on MSCI methodology * Stocks with Market Maker

0%

5%

10%

15%

20%

25%

30%

nov-14 jan-15 mar-15 may-15 jul-15 sep-15 nov-15 jan-16

Inretail Volcan* Pacasmayo* Ferreycorp* Graña y Montero*

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3. Metrics and indicators

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Top Companies Metrics

Month

Metric

1 ATVR - 12 months* 8.9% 8.6% 8.4% 8.8% 8.2% 8.3% 8.0%

2 ATVR - 3 months* 7.4% 7.0% 6.7% 7.5% 7.1% 8.0% 7.2%

3 Frequency of trading - 12 months* 93% 92% 92% 91% 90% 89% 89%

4 Traded Volume Average (US$ thousand)* 393 268 388 478 256 376 342

5 Traded Volume Median (US$ thousand)* 172 128 117 317 103 148 158

* Average weighted by free float

FEB-16DEC-15 JAN-16N° AUG-15 SEP-15 OCT-15 NOV-15

Capital Gains Tax Metrics

Month

Metric

1 Law 30341

2 Rulings and execution

Broker Dealer Metrics

Month

Metric

1 Number of companies with Market Makers 1 1 1 3 6

2 Number of operations with Stock Lending (per month) 2 2 0 0 0

3 Number of operations with Short-Selling (per month) 2 2 0 0 0

4 Transaction Costs - Stock Lending (bps) 8 0 0 0 0

5 Cost facility to Broker-Dealers with propietary trading (bps) 9.6 6.5 0 0 0

6 Transaction Costs - MMK SAB with propietary trading (bps) 0 0 0 0 0

7 Alternative Securities Market (MAV) cumulative issuance US$ 30m US$ 30m US$ 34m US$ 36m US$ 38m

8 Number of securities with Algorithmic Trading 0 0 0 0 0

Market Metrics

Month

Metric

1 Daily total BVL transactions (US$ million) 13.8 12.1 9.5 11.8 13.2

2 Daily equity traded volume (US$ million) 7.1 5.2 4.2 5.4 4.6

3 Equity median traded volume (US$ million) 3.9 4.6 3.5 4.5 4.7

4 Monthly number of orders 16,884 15,893 15,002 15,260 23,247

5 Monthly total transactions 6,174 5,196 4,923 5,550 9,721

6 Number of Investors 1,945 1,911 1,723 1,901 n.a.

7 Total Market Cap (US$ million) 94,976 93,414 90,657 86,214 92,219

FEB-16

FEB-16

FEB-16

DEC-15 JAN-16

N° OCT-15 NOV-15 DEC-15 JAN-16

N° OCT-15 NOV-15

DEC-15 JAN-16N° OCT-15 NOV-15

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4. Index member liquidity

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Total Local Liquidity

Average daily volume - 12 months (US$ million)

Source: Bloomberg, MSCI, BVL

8

50

90

31

23

61

-

10

20

30

40

50

60

70

80

90

100

Lima StockExchange

Colombia StockExchange

Santiago StockExchange

Budapest StockExchange

Prague StockExchange

Egyptian Exchange

* BVL estimates with Nov. 2015 index weights.

Nominal Index Liquidity - weighted average*



44

4 5

12

9 8

-

5

10

15

20

25

30

35

40

45

50

MSCI Peru MSCI Colombia MSCI Chile MSCI Hungary MSCI Czech Rep. MSCI Egypt

(3) (9) (3) (3) (3)(19)

Nominal Index Liquidity - total*



106

28

69

29

2116

-

20

40

60

80

100

120

MSCI Peru MSCI Colombia MSCI Chile MSCI Hungary MSCI Czech Rep. MSCI Egypt

(3) (9) (3) (3) (3)(19)

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5. About SCCO classification

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Southern Copper Corporation (SCCO) is a traditional Peruvian name according to MSCI.

43% of SCCO’s revenue is originated in Peru, and the rest in Mexico.

SCCO represents 5% of Peru exports and 1% of Peru GDP (IM Trust, 2015).

SCCO expansion projects in Peru (Toquepala, Tia Maria, Los Chancas, etc.), will continue to increase Peru share of SCCO revenue mid – long term.

High 3-Year correlation with MSCI Peru and MSCI All Peru Capped Index (~ 0.79), while its correlation with MSCI USA is 0.16. 1/

SCCO may be negatively impacted by the reclassification to USA:

• Including SCCO in USA exposes investors to an equity risk factor entirely outside USA.

• MSCI USA has more than 600 companies, large and mid cap with most of its operations in USA.

• Materials in USA are a small proportion of the MSCI USA index (2.7%), with large names in materials associated to

chemical companies. Copper mining is a small proportion of this sector (less than 3%).

There may be other special cases.

1/ Source: ETF correlations – 3 years, 1 month yields by 7/31/2015.

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6. Bottom line and next steps

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Bottom line 1: Peru complies with market requirements to remain within the EM indices right now, but needs higher liquidity in additional stocks.

Bottom line 2: SCCO should remain within Peru in EM indices, not Developed / USA indices.

Bottom line 3: Volumes are stabilizing and are starting to improve.

Action calls: Improve access and setup conditions for better liquidity

(i) Communicate and disseminate the favorable arguments among investors: Companies, broker dealers and managers can play an active function.

(ii) Execute and deliver initiatives: Peruvian Government and Private Sector.

(iii) Change the declining trend in terms of volumes.

About the consultation process: May 2016, David Garza, [email protected]

mailto:[email protected]

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InPeru New York

Expanding Equity Market Liquidity in Peru

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